Types of Capital Allowances & Their Regulation
UK Property Accountants | UK Property Tax Specialists
Capital allowances are a hugely important way to get tax relief for businesses involved in the UK property market.
As a property business owner in the UK, it's crucial to understand the various types of capital allowances available. With each one having specific requirements and rules, it's important to know which ones apply to your business to maximise your benefits.
Annual Investment Allowance (AIA)
The Annual Investment Allowance allows property businesses to claim the full cost of qualifying capital expenditure in the tax year the expenditure was incurred, up to a specified limit.
For the period between January 1, 2019, and March 31, 2023, the AIA limit was set at ￡1 million. However, from April 1, 2023, the limit has decreased to ￡200,000.
Fortunately, the government has announced plans to make this limit permanent at ￡1 million via new legislation in the Spring Finance Bill 2023.
The AIA can be claimed on various assets, including plant and machinery, computer hardware and software, and commercial vehicles, excluding:
Please note that the regulations and obligations regarding AIA may vary in the future. Thus, it is crucial to seek advice from a tax expert or HMRC to obtain up-to-date details.
Writing-Down Allowance (WDA)
The fundamental principle of Writing-Down Allowance is to provide tax relief for capital expenditures over a period of years, which corresponds to the accounting concept of depreciation.
WDAs are calculated annually based on the decreasing value of an asset, rather than its original cost. To claim WDA, the expenditure on assets needs to be pooled, and the WDA rate depends on the type of pool.
The main pool has a WDA rate of 18%, while the special rate pool has a WDA rate of 6%.
WDA?claims?have?some?conditions, like:
The rules and requirements for WDA claims go beyond what has been mentioned above. It would be beneficial to seek advice from a tax professional for more information on making a claim.
100% First Year Allowance (FYA)
First-Year Allowance enables property businesses to claim a 100% deduction on qualifying capital expenditure in the year the expenditure was incurred.
This means that property businesses can deduct the entire cost of the asset from their taxable profits in the year of purchase, instead of claiming the cost over several years through WDA.
FYA is available for specific assets, including energy-saving equipment and low-emission cars.
To be eligible to claim the allowance, there are some requirements to be met.
It is recommended to consult with a tax professional for the latest information and support.
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Structures and Building Allowances (SBAs)
Structures and Building Allowances are given for the construction costs of commercial properties at a flat rate of 3% per year (2% before April 2020) on a straight-line basis for 33 years and 4 months, but at a higher rate for freeport tax sites.
The expenditure must be incurred on or after October 29, 2018, and is available to UK taxpayers for commercial buildings and structures in the UK or overseas.
Super-Deduction
The concept of?super-deduction was introduced in the 2021 Spring Budget for companies incurring capital expenditure on plant and machinery from April 1, 2021, to March 31, 2023.
This first-year allowance allows a 130% tax deduction, representing a 30% increase from the actual expenditure. For example, a company incurring costs of ￡10,000 may obtain capital allowances of ￡13,000.
It’s important to note that the super-deduction ended on March 31, 2023; however, you can still claim the allowance for the expenditure incurred from April 1, 2021, to March 31, 2023.
The Structures and Building Allowance (SBA) is a valuable tax relief for businesses investing in new commercial structures and buildings or renovating existing ones. Eligibility, qualifying expenditure, annual allowance, timing, clawback, and interaction with other allowances are some of the key rules and requirements to consider when claiming SBA.
Full Expensing
Full expensing is a 100% first-year allowance introduced in the 2023 Spring Budget for companies incurring capital expenditure on plant and machinery from April 1, 2023, to March 31, 2026.
This replaced the previous 130% super-deduction, allowing companies to fully deduct the qualifying capital expenditure from their taxable income in the year it was incurred, rather than spreading it out over multiple years.
Qualifying plant and machinery included in the full expensing allowance are:
There are additional machines and equipment that qualify for complete depreciation that are not listed above. For the most up-to-date information and assistance, it is vital to consult a tax expert.
50% First Year Allowance (50% FYA)
The 50% first-year allowance, also called the SR allowance, which is similar to the super-deduction above. The SR allowance gives a first-year allowance at 50% for the special rate capital expenditure on plant and machinery incurred by companies from April 1, 2021, to March 31, 2023.?
The 2023 Spring Budget brought some good news for property businesses, as the SR allowance has been extended by three years until March 31, 2026.
Only assets eligible for special rate pool allowances qualify as qualifying assets. However, this is not available for used equipment already included in the purchase of a property. To ascertain their eligibility, businesses should consult a tax expert. Items that could qualify for the claim are:
By ensuring that assets meet the definition of plant and machinery, keeping accurate records, and choosing a tax-efficient structure, property businesses can maximise their capital allowances and?reduce?their tax liability.
Don't wait long; consult the top-notch tax professionals for comprehensive support and make your claim.
For more details and support regarding capital allowances in the UK, please visit: https://www.ukpropertyaccountants.co.uk/services/capital-allowances/